The Pound to Euro exchange rate strengthened by over two cents last week in reaction to the Bank of England’s surprise decision to leave rates on hold through July.
Theresa May Rally Boosts GBP/EUR
GBP/EUR began last week’s session at around 1.17 and rose to 1.20 by Wednesday as markets rallied in reaction to the appointment of Theresa May as Prime Minister. Leadership candidate Andrea Leadsom pulled out of the race on Monday and May was sworn into power on Wednesday. Investors cheered the announcement because it prevented Britain suffering from a longer period of uncertainty (the Tory summer leadership contest was expected to last until September 9).
However, the Theresa May rally wore off on Wednesday afternoon and Sterling sank 150 pips versus the single currency ahead of the BoE’s interest rate decision on Thursday. Traders priced in an 80% chance of a rate cut from the UK central bank and this negatively impacted the Pound.
BoE Wrong-foots Investors by Holding Rates
But markets were caught off-guard on Thursday when the Bank of England opted against slashing rates in July. Sterling jumped nearly two cents to 1.20 in reaction to the decision but the BoE’s minutes report suggests further easing will be implemented in August. The minutes showed that policymakers wanted to wait on the sidelines in July so that they could examine incoming data and gain a better understanding of how the ‘Brexit’ decision has impacted the UK economy. The minutes revealed: ‘Most members expected monetary loosening to be loosened in August’ and subsequent remarks suggested that the BoE will restart its bond-buying QE scheme in addition to slashing borrowing costs.
Indeed, GBP/EUR tumbled back towards 1.19 on Friday as BoE Chief Economist Andy Haldane called for ‘muscular’ monetary policy in August, which analysts interpreted as a sign that the bank is likely to announce more than just a rate cut on August 4.
Week Ahead
We have a few significant data points to look out for this week.
Tuesday’s UK CPI print is expected to rise from 0.3% to 0.4% but it is possible that UK inflation could come in even higher than that in future months as the impact of the weaker Pound drives up the cost of imported goods.
The UK unemployment rate is expected to remain at 5.0% on Wednesday but the figure is unlikely to affect GBP/EUR because the data pertains to the month of May and analysts are now more concerned with how the economy is performing after the EU referendum.
Thursday sees the European Central Bank announce its plans for monetary policy in July and the Euro could sustain significant losses if the ECB loosens policy. However, the prevailing view is that the bank will use this opportunity to prime markets for stimulus later down the line rather than act at this juncture.
Overall, the Pound to Euro exchange is liable to trade below 1.20 for most of the week so long as the ECB does not strike an aggressively dovish tone on Thursday.